The Ford Motor Company
February 18, 2003
VIA EMAIL (firstname.lastname@example.org)
Mr. Jonathan G. Katz
Re: File No. S7-02-03
Dear Mr. Katz:
We are pleased to respond to Release No. 34-47137 (the "proposing release"), in which the Securities and Exchange Commission (the "SEC") solicited comments on its proposed rules implementing the provisions of the Sarbanes-Oxley Act of 2002 (the "Act") relating to audit committee independence. Our comments are focused on (1) our support for the exemption from the rule requirements for direct or indirect consolidated majority-owned subsidiaries of issuers that are subject to the proposed rules related to audit committee independence, set forth in Section 10A-3(c)(1) of the proposed rule, and (2) our concern with the lack of clarity in the definition of "indirect" acceptance by a member of an audit committee of consulting, advisory or other compensatory fees, set forth in Section 10A-3(e)(6) of the proposed rule.
Exemption for Subsidiaries
Included in Ford Motor Company's ("Ford's") consolidated financial statements are the financial results and condition of Ford Motor Credit Company ("Ford Credit") and The Hertz Corporation ("Hertz"), both of which are indirect, wholly-owned subsidiaries of Ford Motor Company. Each of Ford Credit and Hertz is subject to the periodic reporting requirements of the Securities Exchange Act of 1934 (the "Exchange Act") by virtue of having outstanding debt securities, the issuance of which has been registered under the Securities Act of 1933. In addition, each of Ford Credit and Hertz has debt securities listed for trading on the New York Stock Exchange.
We concur with the SEC's position that it is not necessary or appropriate for the protection of investors to impose the independent audit committee requirements on subsidiaries of issuers that also have securities traded on a national securities exchange or national securities association (such securities, "Listed Securities" and such exchanges or associations, "Exchanges"). In particular, we believe the problems associated with attempting to obtain independent audit committee members of a majority-owned subsidiary far outweigh any benefit.
As with most wholly-owned subsidiary registrants, the boards of directors of Ford Credit and Hertz are comprised of current or former officers of Ford Credit and Hertz, respectively, and senior officers of Ford. Imposing an independent audit committee requirement on these entities would require a significant change in Ford Credit's and Hertz's boards of directors. Unless exempted from the independence requirements, Ford Credit and Hertz would be required to expend significant resources to identify, attract and retain individuals that satisfied the independence requirements when there will be significant demand for potential audit committee candidates by registrants that have equity Listed Securities. In addition, we believe that we would encounter significant difficulty in attracting such individuals because the operating results, financial condition and liquidity of Ford Credit and Hertz are related to Ford. We believe that persons would be reluctant to serve as an audit committee member of Ford Credit or Hertz without also having significant involvement on Ford's board of directors or Ford's management team so as to have a knowledge base to adequately discharge their duties.
General Instruction I to Form 10-K exempts wholly-owned subsidiaries that issue publicly traded debt securities from the disclosure requirements related to officers, directors and board committees. This long-standing exemption supports the basic principle that investors who hold debt securities primarily rely on their contractual rights and the power of an indenture trustee to protect their interests rather than a company's directors. Furthermore, while the identification of audit committee members and their independence status is directly relevant to shareholders that elect directors, we believe it is of significantly less value to debt holders, who typically cannot even participate in the director election process.
Moreover, subsidiary companies captured by the scope of the exemption are already subject to oversight by the parent company, and the addition of an independent audit committee at the subsidiary level would simply be duplicative. We believe that audit committees of parent companies with equity Listed Securities are involved in the review of financial statements and internal controls of material subsidiaries, including wholly-owned subsidiaries with debt Listed Securities. For Ford Credit and Hertz, this is certainly the case. Each of Ford Credit and Hertz is presented and discussed as a separate operating segment of Ford, and its financial results and condition are otherwise addressed in detail, in Ford's quarterly and annual reports on Forms 10-Q and 10-K, which Ford's audit committee, comprised solely of independent directors, regularly reviews. In addition, Ford's board of directors reviews the business plans and budgets of, and strategic matters involving, Ford Credit and Hertz on a regular basis and Ford's audit committee reviews the control environment of Ford Credit and Hertz on a regular basis. In short, the independent audit committee of a parent company provides the necessary oversight for the parent's consolidated subsidiaries. Indeed, a parent's audit committee could not be comfortable with the financial reporting effectiveness of the parent without also being comfortable with the financial reporting effectiveness of its consolidated subsidiaries, particularly those who are themselves reporting companies under the Exchange Act.
Indirect Consulting, Advisory or Other Compensatory Fees
Consistent with Section 301 of the Act, the proposed rule specifies that to be considered independent, an audit committee member may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee, "accept directly or indirectly any consulting, advisory, or other compensatory fee from the issuer." The proposed rule goes on to specify that the acceptance of such a fee "by an entity in which such member is a partner, member or principal or occupies a similar position and which provides accounting, consulting, legal, investment banking, financial or other advisory services or any similar services to the issuer" constitutes "indirect" acceptance by that audit committee member.
As you state in the proposing release, and as is clear by the nature of the services specified in the definition, the proposed rule would not preclude an independence determination on the basis of ordinary course commercial business relationships between the issuer and an entity with which the director has a relationship. Rather, there must be present the rendition of one or more of the listed professional or advisory services for which a fee is paid. It is unclear, however, what, if any, boundaries there are regarding the amount of services or fees that must be involved or when such services must have been performed in order to preclude an independence determination. Thus, depending on how one interprets the definition, a prospective member of an issuer's audit committee would not be considered independent if he or she was, for example, a member of a law firm that on one occasion several years ago provided minor legal services (e.g., drafting and filing a UCC financing statement) for which the issuer paid an immaterial fee. Alternatively, because the definition uses only present tense terms, an equally plausible interpretation would be that the director would be considered non-independent only during any period of time that the law firm is actually providing legal services to the issuer. We urge the SEC to consider materiality standards and other parameters in regard to the timing and amount of services and fees necessary to preclude an independence determination. The parameters used in Item 404 of Regulation S-K to delineate disclosures regarding related party transactions and relationships between directors and issuers could be directionally helpful and would not compromise any sense of independence.
Further, the audit committee member in question must be a "member, partner or principal or occup[y] a similar position" of the entity providing services to the issuer to be considered non-independent. This makes it fairly clear that persons who are the economic "owners" of a private professional firm that provides services to an issuer would not be considered independent. On the other hand, we assume by the language of the proposed rule that a prospective audit committee member who is an officer of a corporate provider of the prohibited services would not be considered non-independent, particularly in the context of a large, publicly traded corporation. For example, some investment banks are owned by publicly traded conglomerates in which the investment banking business may constitute only a relatively small part of the overall business. A prospective audit committee member who is an officer of the conglomerate should not be considered non-independent if the issuer received and paid for investment banking services rendered by a subsidiary of the conglomerate. Although the prospective audit committee member may own shares in the conglomerate, he or she would not be considered an "owner" of the enterprise in the same way a partner would be of a private accounting firm. In other words, in this context the degree of ownership would be far less and, therefore, the degree to which the individual would benefit from the relationship would be far less. We urge the SEC to be more explicit in regard to the necessary nexus between the prospective audit committee member and the entity providing the prohibited services to the issuer.
Should you have any questions or would like to discuss our comments, please feel free to contact me by telephone at 313-323-2260 or by email at email@example.com.